Cosigners in Bankruptcy
Filing bankruptcy will affect many areas of your life, as you've probably realized if you're seriously considering a bankruptcy filing. Keep in mind, though, that by filing bankruptcy, you may also affect the finances of your friends and family, depending on your loan history.
If you've ever gotten a loan with help from a cosigner, you need to know how filing bankruptcy may affect that person.
Below are the basics but be sure to fill out the below free bankruptcy case review form to talk to a bankruptcy lawyer for free about your questions.
What is a Cosigner?
Cosigners are like the financial equivalent of spotters at the gym - if you can't make your loan payments, your cosigner is generally legally obligated to bail you out by seeing that your loan is repaid. A cosigner typically has a stronger credit history than the primary borrower, and so helps the borrower qualify for more attractive loan terms (e.g. lower interest rates).
Cosigners are perhaps most commonly used for:
- Adult children with limited credit histories: Parents can often help their grown children get more favorable loan terms by cosigning loans. Because older adults tend to have more established and stronger credit histories than younger adults, parents can help their kids qualify for better loan terms.
- Those rebuilding credit after bankruptcy: Loans are more difficult to obtain directly after a bankruptcy filing, but borrowing money and making timely repayments is an excellent way to rebuild credit. Cosigners with healthy credit can facilitate that process.
Bankruptcy and Cosigners
So how are your cosigners (or "codebtors," as they're often called in legal documents) affected when you file bankruptcy? That depends largely on which chapter of the U.S. Bankruptcy Code you file under.
- Chapter 7 Bankruptcy: In Chapter 7, certain debts are completely discharged, meaning that filers do not have to pay them. Because the cosigner literally signed his or her name to a loan to guarantee repayment, he or she is left with the burden repayment.
- Chapter 13 Bankruptcy: In Chapter 13, debts are rearranged and filers make regular payments under a court-ordered repayment plan. As long as the filer follows the plan, cosigners are protected by a "codebtor stay."
Keep in mind that, before you file bankruptcy, any late or missed payments on a loan for which you have a cosigner will hurt your cosigner's credit as well as your own. And cosigners for business loans (rather than personal ones) are not protected at all in bankruptcy.
How to Protect Your Cosigners When Filing Bankruptcy
While a Chapter 13 bankruptcy may benefit your cosigner more than a Chapter 7 bankruptcy would, keep in mind that you have to file under the chapter that works best for your finances and your financial recovery. Your cosigner signed a legal document guaranteeing payment of a loan and took on considerable responsibility when he or she did so.
Because this can be a delicate matter (especially when family and friends are involved), consider talking with a bankruptcy lawyer about which chapter will best address your financial needs and help you get the fresh financial start the U.S. Government promises.
Related Pages:
How to Avoid Bankruptcy Fraud
Peer-to-Peer Lending
Do's and Don'ts of Improving Your Credit
